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What is the difference between a 203(K) streamline and 203(K) standard loan?

A 203(K) streamline loan is used to purchase or refinance a home that needs minor repairs or upgrading. The total repair escrow amount including all eligible fees cannot exceed the maximum limit of $35,000. Streamlined 203(K) improvements include repairing the roof, replacing the gutters, upgrading the plumbing, heating, cooling or electrical system. Also includes non-structural repairs, such as interior or exterior painting; and upgrading appliances, such as the refrigerator, washer, dryer or built-in microwave. Basement remodeling, basement water proofing, window and door replacement are also accepted with a streamlined 203(K) loan.

A standard 203(K) loan allows homeowners to borrow a minimum of $5,000 for eligible improvements. In order to complete the transaction, all Minimum Property Standards (MPS), Health & Safety, local requirements and repairs cited by the FHA appraiser are required to be satisfactory. Standard 203(K) improvements include plumbing and electric upgrading, roofing repairs, floor treatments, energy efficiency items, upgrading heating and cooling units, structural work or replacing free-standing appliances.

How do I qualify for a rehab loan?

In order to qualify for a rehab loan, there are specific program requirements homeowners must meet. These guidelines are issued by the Department of Housing and Urban Development (HUD), which include the following:

  • First, you need to find a property that needs sufficient improvements before you can live in it. From there, make an offer on the house. Remember to include in your purchase and sale contract that you are using an FHA 203(K) loan.
  • Only qualified lenders can approve of an FHA 203(K) loan. The HUD can provide you a list of qualified lenders that can assist you. Once you have chosen your lender, you will submit a loan application, which includes a detailed list of repairs and improvements that need to be made and the cost of each repair.
  • Your mortgage lender will have their own set of requirements for homeowners to meet. In order to qualify, you must meet all of their requirements. These qualifications typically include minimum credit scores, proof of income, debt-to-income ratios and down payment.
  • After your loan is approved, a closing date will be set. When closing day arrives, the seller will be paid. The money to cover rehab expenses will be placed into an escrow account which will be controlled by your mortgage lender. Once the closing phase is completed, your contractor may begin rehab construction.
  • During certain points of the rehab process, your contractor will list what projects have been completed and their total costs. Your lender will request these updates to see if improvements are acceptable. If improvements are approved by your lender, they will be paid from your escrow account.

What are FHA 203(K) loan limits?

The maximum amount of money a homeowner can receive using a FHA 203(K) depends on the type of loan you get (regular vs. streamlined and purchase vs. refinance loan). The minimum amount you can borrow under an FHA 203(K) loan is $5,000. The maximum amount you can borrow under an FHA 203(K) is the lesser of two amounts, which are the following:

  • 1. The Nationwide FHA Mortgage Limits, or
  • 2. The Loan-to-Value (LTV) ratio from the Purchase Loan-to-Value Limits are multiplied by the lesser of:
    • a. 110 percent of the After Improved Value, or
    • b. The Adjusted As-Is Value, in addition to the following:
      • i. Financeable Repair and Improvement Costs, for Standard 203(K) or Limited 203(K)
      • ii. Financeable Mortgage Fees, for Standard or Limited
      • iii. Financeable Contingency Reserves, for Standard or Limited
      • iv. Financeable Mortgage Payment Reserves, for Standard only
With refinancing, they have similar loan limits as above. However, homeowners should evaluate their existing debt and fees of their existing loan.

With a streamlined loan, you can borrow as much as the purchase price of the home, in addition to $35,000 with no minimum repair costs. In order to get an accurate as-is value on the property or an estimated value of the property post-rehab, homeowners may need to get an appraisal.

What are FHA 203(K) allowable repairs?

There are two types of FHA 203(K) loans homeowners can finance. A regular or standard 203(K) loan is designed for properties that need structural repairs, remodeling, landscaping or room additions. A streamlined or limited 203(K) loan is meant for energy conservation improvements, new roofing, new appliances, or non-structural repairs, such as painting.

Other repairs that an FHA 203(K) loan will cover include:

  • Decks
  • Patios
  • Bathroom and kitchen remodels
  • Flooring
  • Plumbing
  • New siding
  • Additions to home (i.e. adding a second story, garage, etc.)
  • Heating and air conditioning systems
However, this loan does not cover more luxurious additions, such as a tennis court, fire place or pool. Additions that are used for commercial use are not accepted. These renovations do not help the home’s overall quality or become a permanent part of the property.

What types of properties qualify for an FHA 203(K) loan?

Certain homes are approved for an FHA 203(K) loan. The qualifying homes include the following:

  • A one to four-family home that has been completed for at least a year
  • A home that has been torn down, but has still has some foundation in place
  • A home that you want to move to a different location
  • Co-op homes are not accepted, but some condos are eligible
Properties also must qualify under FHA requirements already established by the Department of Housing Urban Development (HUD). For example, the home’s value cannot exceed the loan’s maximum amount, which depends on what area you live in.

What are FHA 203(K) contractor requirements?

According to the Department of Housing Urban Development (HUD) contractors are required to follow specific instructions when dealing with a rehab loan project. Typical contractor responsibilities include:
  • Contractors must provide a homeowner/contractor agreement
  • Contractors must provide a detailed estimation of when the work will be finished
  • Contractors must complete work in the timeframe agreed upon in contract
  • Contractors must meet all local licensing and bonding requirements
  • Contractors must provide licensing, bonding and reference information to mortgage lender
  • Contractors must obtain permits, if not obtained by homeowner

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